Has the regulator implemented rules in relation to remuneration paid by banks to its staff?
No, the Banking Supervision Department of the South African Reserve Bank has not yet published any rules or limits with regards to remuneration paid by banks to its staff.
What categories of staff are caught by the regulator’s rules?
What are the key regulatory rules?
Are bonuses subject to the regulator’s rules?
No, only in respect of disclosures – see question six below.
What is the position concerning role based allowances?
Do the regulator’s rules on remuneration have extraterritorial effect?
Do you anticipate further reform in this area?
The so-called “bonus cap” brought about when the European Parliament voted and adopted the Capital Requirements Directive IV, effective from January 1, 2014, has an effect on three local South African banks that have foreign controlling companies. The “bonus cap” rule applicable in the EU, requires that high-level banking employees may no longer receive bonuses that are more than their fixed pay for the year. Financial institutions such as Investec Bank Limited, Absa Bank Limited and Nedbank Limited have foreign controlling companies which means that these local banks may be impacted by the adoption of the “bonus cap” rule by their foreign controlling companies.
It is possible that the South African regulators could, in time, adopt a similar approach to bank staff remuneration adopted in other jurisdictions. Preliminary indications from the South African Reserve Bank are that individual staff members are only accountable to the Bank’s board of directors and need only to report to the Bank’s board. In terms of the South African Banks Act, 1990, each bank must appoint a Remuneration Committee. At this stage, this committee is not required by any law of regulation to restrict or cap remuneration.
The Remuneration Committee is made up of only non-executive directors and the functions are to assist the bank’s board of directors with the following activities:
- to oversee the compensation system’s design and operation;
- to exercise competent and independent judgment on compensation policies, processes and practices and the incentives created for managing risk, capital and liquidity;
- to evaluate practices by which compensation is paid for potential future revenues in respect of which the timing and likelihood of realization remain uncertain;
- to ensure that all relevant decisions are consistent with an assessment of the bank or controlling company’s financial condition and future prospects;
- to work closely with the bank or controlling company’s risk and capital management committee in the evaluation of the incentives created by the compensation system;
- to ensure that the bank or controlling company’s compensation policy, processes and procedures are in compliance with the relevant requirements specified in the Regulations to the Banks Act (Regulations) and such further requirements as may be specified in writing by the Registrar of Banks (Registrar);
- to conduct an annual compensation review independently of management, which review shall, among other things, assess the bank or controlling company’s compliance with the Regulations and such further requirements as may be specified in writing by the Registrar;
- to ensure that the remuneration of employees in the risk control and compliance functions is determined independently of all relevant business areas, and is adequate to attract qualified and experienced staff;
- to ensure that performance measures are based principally on the achievement of the board approved objectives of the bank or controlling company and its relevant functions; and
- to consult shareholders.
Must an institution’s remuneration policy be disclosed to the regulator?
Yes, an institution’s remuneration policy must be disclosed to the regulator in terms of the regulations which provide for capital adequacy and leverage requirements. In addition to this an institution must on a regular basis, but no less frequently than once a year, disclose to the public the relevant qualitative and quantitative information related to its remuneration policies, processes and procedures.
The regulations contain detailed requirements in respect of the information which the institution must disclose to the public, namely information is respect of:
- the bank’s relevant governance and/or committee structures;
- the design and operation of a bank’s remuneration structure and frequency of review;
- the independence of remuneration for risk and compliance staff;
- the relevant risk adjustment methodologies;
- the link between remuneration and performance;
- the relevant long term performance measures such as deferral, malus or clawback and the relevant types of remuneration such as cash versus equity and fixed versus variable remuneration.
The regulations require information with a specific distinction between the institution’s senior management and the other employees whose actions may have a material impact on the institution’s exposure to risk which includes information on the relevant number of employees who received a variable remuneration award during the year as well as the relevant number of and total amount of guaranteed bonuses, sign-on award and severance payments made during the financial year.
The directive issued for the interpretation of the returns concerning capital adequacy and leverage also give the regulator the power to direct an institution to align its remuneration policies, processes and procedures with the institution’s relevant exposure to risk if the regulator is not satisfied that the institution’s remuneration policies, processes and procedures are adequate.